It's OK to calm down about the economy. Yes, Friday's unemployment news was bad. Yes, the NASDAQ and Dow Jones neared correction territory on Friday morning. And yes, the Sahm Rule Recession Indicator has now been triggered. Odds are, though, a recession is not imminent. 

Here are three reasons why, in descending order of optimism. One, recent growth has been strong. Two, the economy has been near full employment for a while, and some kind of job growth slowdown is almost inevitable. Three, we're past the window where Federal Reserve actions can influence the election, though its recent behavior is still worrying.

Last week, the media's manic mood swing was on the exuberant side from news of a strong 2.8 percent gross domestic product (GDP) growth in the second quarter of 2024, which ended on June 30. This was a surprise improvement on the previous quarter's 1.4 percent growth. A normal reading is around 2 percent. Better, most of that growth was in the private sector, especially in consumer spending and inventory investment.

The current quarter's GDP growth estimate will come out on October 30. It would take a drastic swing to move from 2.8 percent to negative in just one quarter, though it has happened before. It typically takes two consecutive quarters of negative growth for the National Bureau of Economic Research to declare a recession, though its official standard is to call it as they see it.

The unemployment rate went up from 4.1 percent in June to 4.3 percent in July. June's reading snapped a 30-month streak of unemployment at or under 4 percent. This was the longest such streak since the 1960s.

For context, anything under 5 percent is considered pretty good. The eurozone's unemployment rate is currently 6 percent and often tops 10 percent, even in good times.

When an economy is essentially at full employment, a slowdown in job growth isn't necessarily cause for worry. The economy still has 8 million job openings, and the labor force still grew by 114,000 jobs. That annualizes to more than a million more jobs per year. 

That is slower than population growth, which isn't ideal. The labor force participation rate is also still below prepandemic levels. But a sane immigration policy combined with labor reforms like loosening occupational licensing requirements would fill more of those job openings while creating more opportunities for workers who are still outside the labor force.

The Federal Reserve's recent actions spark some worry. The Fed has spent the last two-and-a-half years walking back its panicked overreaction to COVID-19, which caused high inflation in the first place, along with a bipartisan deficit spending explosion. Inflation is finally slowing and getting back close to its 2 percent target, down from its 9.2 percent peak.

The trouble is that Fed Chairman Jerome Powell indicated that the Fed will stop focusing solely on inflation and will now pay attention to the labor market as well. The Fed has a dual mandate that tasks it with both keeping inflation low and keeping employment high. These can contradict each other, as Powell might soon find out.

If unemployment continues to worsen, look for the Fed to counteract that with stimulus in the form of interest rate cuts and monetary expansion. The tradeoff to this stimulus is higher inflation—exactly what the Fed has been fighting.

While an expected interest rate cut in September isn't a big deal by itself, if it's the start of a larger stimulus campaign, any short-term economic boost will come at the cost of a slowdown later.

The Fed's actions have lag times ranging from about six months to 18 months, so anything it does now will not impact the election. This is good news for the Fed's independence, but it does not inspire faith in Powell's commitment to fighting inflation. It would be better for the Fed to stay focused on inflation. Monetary policy is a poor tool for job creation. Entrepreneurs have a much better track record.

As usual, the big picture is a mix of short-term pessimism and long-term optimism. Whether or not the current recession doommongering comes true, the long-term trend of increasing superabundance will hold. That's as good a reason for calm as any.

The post Recession Is Not Inevitable, Despite Stock Market Slump appeared first on Reason.com.

A bummer of a jobs report released Friday morning triggered a sharp drop in the stock market and stoked fear of a coming recession—thanks to something known as the "Sahm Rule."

So what is that?

It is named after economist Claudia Sahm, who served as a top economic advisor during the Obama administration and identified a historical indicator of coming recessions in 2019: every time since 1970 that the three-month moving average of the U.S. unemployment rate is more than half a percentage point above the lowest three-month moving average from the previous year, a recession has soon followed.

That's a bit complicated, admittedly. If you want to know what it looks like in practice, check out today's jobs report. Unemployment in July ticked upwards to 4.3 percent. Over the past three months, the average unemployment rate has been 4.13 percent. That's quite a bit higher than the lowest three-month average from the past year—which was 3.63 percent, between June and August 2023.

Thus, the Sahm Rule has been triggered.

But the "rule" is also a set of guidelines. In the 2019 paper where Sahm identified this historical early warning system for a coming recession, she called for governments to begin distributing stimulus payments as soon as this alert was triggered. Doing so, she argued, would allow for a speedier response to a recession by eliminating the lag that occurs while politicians and other observers debate whether a recession is coming and what to do about it. Essentially, it is meant to be a technocratic solution to a recurring problem.

The political system has not adopted that approach—and thank goodness, because the federal government is $35 trillion in debt and already on pace to run a $2 trillion deficit this year. There's literally no money for stimulus checks right now.

The markets, however, seem to be taking the Sahm Rule seriously. There was a huge sell-off on the stock market Friday morning and bond yields fell as well—an indication that investors are essentially "pricing in" the cost of a coming downturn.

But there's one more complicating factor. Sahm herself says this might be a false alarm.

The Wall Street Journal reports that "Sahm doesn't think the economy is on the immediate cusp of a recession. She reckons that changes in the supply of labor since the pandemic, including the recent jump in immigration, have led the Sahm rule to overstate how weak the job market is."

"We are still in a good place, but until we see signs of stabilizing, of leveling out, I'm worried," Sahm, who also worked at the Federal Reserve and is now the chief economist at New Century Advisors, an investment firm, told the Journal.

It's good to be cautious about the predictive power of historical trends. Indeed, in that 2019 paper, Sahm warned that "the Sahm rule is an empirical regularity. It's not a proposition; it's not a law of nature."

Federal Reserve Chairman Jerome Powell echoed that sentiment this week. He called the Sahm Rule "a statistical regularity" on Wednesday, adding that "it's not like an economic rule, where it's telling you something must happen." At a meeting earlier this week, the Federal Reserve decided to hold interest rates steady, though it indicated that a rate cut could be coming in September.

So are we heading for a recession or not? As always, it's impossible to know until we're already in one. The commonly used definition of a recession is back-to-back quarters of negative economic growth—but the economy grew by 2.8 percent during the second quarter of 2024. By that metric, it would take until the end of the year for the country to be in a recession.

The official arbiter of recessions is the National Bureau of Economic Research (NBER), a private entity whose definition of a recession takes into account monthly indicators like employment, personal income, and industrial production along with quarterly gross domestic product (GDP) growth (by their terms, two consecutive quarters of negative GDP growth often, but not always, correspond with an official recession).

Still, the outlook is certainly darker after Friday's jobs report. If a recession is coming, the federal government's and Federal Reserve's ability to respond will be severely limited by the poor fiscal and monetary decisions that have left the Treasury deeply in debt and the central bank's balance sheets overstretched.

The Sahm Rule has correctly predicted every recession in the past half-century. Let's hope it got this one wrong.

The post What's the Sahm Rule? Alarming Jobs Report Raises Recession Risk. appeared first on Reason.com.

Congressional Budget Office (CBO) projections provide valuable insights into how a big chunk of your income is being spent and reveal the long-term consequences of our government's current fiscal policies—you may endure them, and your children most certainly will. Yet, like most other projections looking into our future, these numbers should be taken with a grain of salt. So should claims that CBO projections validate anyone's fiscal track record.

So much can and likely will happen to make projections moot and our fiscal outlook much grimmer. Unforeseen events, economic changes, and policy decisions render them less accurate over time. The CBO knows this and recently released alternative scenarios based on different sets of assumptions, and it doesn't look good. It remains a wonder that more politicians, now given a more realistic range of possibilities, aren't behaving like it.

First, let's recap what the situation looks like under the usual rosy growth, inflation, and interest rate assumptions. Due to continued overspending, this year's deficit will be at least $1.6 trillion, rising to $2.6 trillion by 2034. Debt held by the public equals roughly 99 percent of our economy—measured by gross domestic product (GDP)—annually, heading to 116 percent in 2034.

The only reason these numbers won't be as high as projected last year is that a few House Republicans fought hard to impose some spending caps during the debt ceiling debate. The long-term outlook is even scarier, with public debt reaching 166 percent of GDP in 30 years and all federal debt reaching 180 percent.

No one should be surprised. To be sure, the COVID-19 pandemic and the Great Recession made things worse, but we've been on this path for decades.

Unfortunately, if any of the assumptions underlying these projections change again, things will get a lot worse. That's where the CBO's alternative paths help. Policymakers and the public can better see the potential risks and opportunities associated with various fiscal policy choices, enabling them to make more informed decisions.

For instance, the CBO highlights that if the labor force grows annually by just 0.1 fewer percentage points than originally projected—even if the unemployment rate stays the same—slower economic growth will lead to a deficit $142 billion larger than baseline projections between 2025 and 2034. A similarly small slowdown in the productivity rate would lead to an added deficit of $304 billion over that period.

Back in 2020, the prevalent theory among those who claimed we shouldn't worry about debt was that interest rates were remarkably low and would stay low forever. As if. These guys have since learned what many of us have known for years: that interest rates can and will go up when the situation gets bad enough. So, what happens if rates continue to rise above and beyond those CBO used in its projections? Even a minuscule 0.1-point rise above the baseline would produce an additional $324 billion on the deficit over the 2025-2034 period.

The same is true with inflation, which, as every shopper can see, has yet to be defeated. If inflation, as I fear, doesn't go away as fast as predicted by CBO—largely because debt accumulation is continuing unabated—it will slow growth, increase interest rates, and massively expand the deficit. To be precise, an increase in overall prices of just 0.1 points over the CBO baseline would result in higher interest rates and a deficit of $263 billion more than projected.

Now, imagine all these variations from the current projections happening simultaneously. It's a real possibility. The deficit hike would be enormous, which could then trigger even more inflation and higher interest rates. The question that remains is: Why aren't politicians on both sides more worried than they seem to be?

What needs to happen before they finally decide to treat our fiscal situation as a real threat? President Joe Biden doesn't want to tackle the debt issue. In fact, he's actively adding to the debt with student loan forgiveness, subsidies to big businesses, and other nonsense. Meanwhile, some Republicans pay lip service to our financial crisis, but few are willing to tackle the real problem of entitlement spending.

The time for political posturing is over. The longer we wait to address these issues, the more severe the consequences will be for future generations. It's time for our leaders to prioritize the nation's long-term economic health over short-term political gains and take bold steps toward fiscal responsibility. Only then can we hope to secure a stable and prosperous future for all Americans.

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